§ Mr. Calum Macdonald (Western Isles)
I begin by expressing my gratitude at being given the opportunity to hold this debate, especially as my previous debate had to be withdrawn. It is happy timing to be able to have this debate in the week before the Budget.
You have visited my constituency, Mr. Deputy Speaker, so you know that it is composed of remote islands. So remote are they that the BBC saw fit to use one as the location for its series "Castaway". Of course, the BBC mythology that the islands are inhospitable and uninhabitable is absurd and extreme, but they are remote, and that remoteness creates difficulties for the communities who live there.
The difficulties are felt most, not by those who have to live on an island for a 12-month docusoap, but by those who live there for year after year, under Government after Government. Cheap and easy transport is essential to the economic well-being and social welfare of the communities who inhabit these remote islands.
In Britain's inner cities, social exclusion means poor education, low incomes, drugs and crime. In Britain's remote islands, it means expensive and difficult transport, which compounds the difficulties implicit in the geographic reality of remoteness. It means exclusion from the economic rhythms and benefits that mainland Britain takes for granted. Combating social exclusion in the remote areas therefore requires Government policies designed above all else to improve transport links, and to try to reduce—or at the very least contain—their cost.
I acknowledge that other parts of Britain are affected by Government policies on petrol duty and air passenger duty, and I welcome the interest of other hon. Members in this debate. However, I deliberately gave the debate a narrow title, to emphasise to my hon. Friend the Minister that the impact of those duties on remote island communities differs significantly from their impact elsewhere. The Government's future thinking must take account of that special impact.
The key to understanding the problem with fuel duty is to appreciate remote communities' greater dependence on transport by private car, given the obvious lack of public transport alternatives. I also want to highlight the scale of the gap between fuel prices in the most remote areas and in urban, mainland Britain.
§ Mrs. Ray Michie (Argyll and Bute)
I thank the hon. Gentleman for giving way, and congratulate him on securing this debate. He will be aware that 68 per cent. of people in the highlands and islands own cars, or have access to them. The Scottish average is 57 per cent. Does he agree that no amount of improvement in public transport will ever overcome the need of people in remote areas to use cars? Public transport cannot go up every track and into every village. Is not it imperative that we make it clear that there is a great dependence on access to private cars?
§ Mr. Macdonald
The hon. Lady makes a valid point. It is especially valid in connection with remote island communities, such as those that her constituency also contains.
107WH To illustrate the price gap that I mentioned, I have the latest "Pricewatch!" leaflet produced by comhairle nan Eilean Siar, the Western Isles council. It shows that motorists in the western isles paid 84p per litre for unleaded petrol in January. That is lop a litre—or 45p a gallon, in the older measure—more than motorists in Glasgow paid. That is a real price gap.
The Office of Fair Trading is investigating that gap, and its report is awaited with interest. However, the high price paid in remote communities, if not the gap itself, is clearly related to the level of the duty. Higher prices in the highlands also mean that disproportionately more is paid to the Treasury in the form of value added tax. It is estimated that the Treasury collects almost £3 million more in VAT in the highlands and islands than would be the case if uniform prices were in operation across the United Kingdom.
I acknowledge that fuel duty is an important tax for the Government; for environmental and revenue reasons. I do not disregard those benefits for the Government, nor do I want to downplay them. I do not argue against the basic philosophy underlying fuel duty, which is to exert pressure to make cars cleaner and more fuel-efficient. However, it is now time for the Treasury to pause, and to take stock of how it collects fuel duty, in light of that duty's enormous and rapid growth in recent years.
Fuel duty now pulls in almost £23 billion for the Treasury. It is the fourth biggest tax levied by the Inland Revenue and Customs and Exercise, after income tax, VAT and corporation tax. In comparison, the combined duties on wines, spirits and beer raise less than £8 billion. Tobacco tax raises less than £6 billion, while capital gains tax and inheritance tax raise less than £5 billion between them. In fact, apart from the big four taxes that I have mentioned, no tax levied by the Inland Revenue and Customs and Exercise raises more than £10 billion a year.
I cite those figures because I do not believe that the Government can continue to levy so huge a tax in a rigid, uniform, one-size-fits-all way across the whole of the UK. The other three "big four" taxes are not levied in that way: fuel duty should not be levied in that way either.
We accept that the other big taxes have to be adjusted and adapted if they are to be seen as fair, and if a political reaction against them is to be avoided. Adjustments to income tax and corporation tax are made according to income levels, and VAT is made fairer by the exemption of food and children's clothes. Similarly, we should adjust how we levy fuel duty, given the scale of the revenue that it brings in.
It will not be enough to hypothecate future increases in the duty. The manner of its collection will have to be adjusted as well, if the Government wish it to continue to play an important role in achieving their targets of revenue growth and environmental improvement.
The obvious way to adjust fuel duty so that it is seen to be fairer is to provide a concession targeted at the most remote of our rural communities. Other countries do that, and so should we. There will be technical difficulties in devising such a scheme, but the Treasury must make a real effort to overcome them.
I want to leave other hon. Members time to speak, so I shall turn briefly to air passenger duty. Once again, the situation facing remote islands communities is unique. 108WH Elsewhere in Britain, air services are a convenience, or even a luxury. They are certainly not a travel necessity. For the remote islands, however, they are an essential lifeline to the mainland. That is why the health services in the remote islands use air transport regularly—almost daily—to move patients and staff between the islands and mainland facilities.
The Government provide a subsidy to maintain non-profitable island-to-mainland links. That subsidy has been approved by the European Union through a public service order. That is why I believe that it is simply wrong for these lifeline air services to be subject to air passenger tax in the same way that regular air services around the UK are subject to it. I welcome the Government's consultation on that point. It is certainly more than the previous Government ever conceded.
However, I must caution my hon. Friend the Minister that the proposed exemption of internal flights between the highlands and islands will exempt only a quarter of the flights between islands and mainland Scotland. Most flights—the most expensive ones—are between the islands and other parts of Scotland that lie outside the highlands. They too must be exempted if the Government's expression of good intentions is to be turned into reality.
That proposition has the support of the hon. and learned Member for Orkney and Shetland (Mr. Wallace), who cannot attend this debate because of his duties in the Scottish Parliament, and of my hon. Friend the Member for Inverness, East, Nairn and Lochaber (Mr. Stewart), who is absent for similar reasons. However, both have written to the Minister on this matter. I hope that he will take heed of their representations, and of the points that I have raised.
§ The Financial Secretary to the Treasury (Mr. Stephen Timms)
I begin by congratulating my hon. Friend the Member for Western Isles (Mr. Macdonald) on securing this debate. I know that he has been taking a close interest in these topics for a considerable period.
The matters that my hon. Friend has raised are of serious concern to people in remote communities. He rightly reminded us of the reliance that they place on the car for their daily transport. The hon. Member for Argyll and Bute (Mrs. Michie) made the telling point that car ownership statistics were higher in this part of Scotland than in others.
My hon. Friend will recall that I acknowledged those concerns when he led a delegation from the Highlands and Islands Transport Forum, which I met at the Treasury on 24 January. The Government's White Paper "A New Deal for Transport", which was published in July 1998, set out our aim of extending choice in transport and securing mobility in a way that supports sustainable development. The White Paper recognises that fiscal measures and economic instruments have a major role to play in influencing travel choice and encouraging sustainable development. Road transport alone accounts for more than 20 per cent. of carbon dioxide emissions and nearly 50 per cent. of nitrogen oxide emissions, so limiting those emissions is potentially important in tackling the environmental challenges that we all face.
The Chancellor of the Exchequer is very aware of the concerns of people in rural areas. It was in recognition of those concerns and others that he announced in the 109WH pre-Budget report in November that he would in future consider all social, economic and environmental factors when reaching his Budget decisions on the appropriate rates of fuel duty—including, of course, the affordability of fuel in remote and rural communities—rather than continuing with the automatic fuel duty escalator that has applied for a number of years. It was also in recognition of those concerns that my right hon. Friend announced that Customs and Excise would be consulting on an exemption from air passenger duty for flights from the Scottish highlands and islands. I am grateful to my hon. Friend for his welcome for that announcement, and I will return to it a little later in my remarks.
My hon. Friend emphasised the price differences in petrol and diesel between the remote islands and urban areas in Scotland. He made the case for Government action to address those differences. It is worth saying that there is no difference in the duty paid on a litre of petrol sold in Glasgow and a litre sold in Benbecula. The Treasury does not collect more duty according to the retail price of the fuel. The question is why fuel is more expensive in remote areas or, alternatively, why it is less expensive in urban areas. My hon. Friend's point about VAT is accurate, but it does not apply to duty. Whether the Treasury collects less VAT as a result of that is a matter for debate, because it depends on what else that money would have been spent on. However, my hon. Friend's point about a higher amount of VAT being collected per litre is correct.
On the price of fuel, a number of different economic factors come into play. It costs more to transport fuel to remote areas, the volumes sold are not as great as in towns and cities, and there is not the competition found in urban areas, particularly given the presence of supermarkets. By contrast, in urban areas, transport costs are less, greater volumes cut operating costs and intense competition between the major suppliers lowers pump prices.
The Office of Fair Trading is working to ensure that there is no cartel on pricing in the petrol market. In May 1998, its report on competition in the supply of petrol in the United Kingdom specifically considered the supply of petrol in remote rural areas, including the structure of the market in north-west Scotland. The report concluded that consumers were not paying over the odds for their petrol in that part of the country. It said that higher prices were a function of the extra costs of supply and the fact that there is less competition there than elsewhere. There was no evidence of the operation of cartels. My hon. Friend has already said that the OFT is considering these issues afresh. Like him, I look forward to its report, which I understand is likely to be available later in the spring.
My hon. Friend makes the point that, given the size of the take on fuel duty, we cannot impose a one-size-fits-all approach. In reality, we do not—there are already differential rates for cleaner fuels, for example. That has been a feature of the fuel duty system for some time. However, on none of the taxes that he describes as the big four—his analysis was interesting—do we apply different rates on a geographical basis. I suggest that any attempt to do so would create serious difficulties. In all 110WH four cases, rates are applied in exactly the same way across the country. There is variation in the rate of those taxes, but not on a geographical basis.
The Government take seriously the transport needs of those in remote areas. We have already introduced a number of measures to address them. We allocated an additional £50 million to rural bus services in the 1998 Budget; we established the rural bus challenge fund; we set up a new rural transport partnership fund; we announced in the 1999 Budget a 20 per cent. increase in funds for rural bus services; and we announced that bus fuel duty rebate will rise in line with the rate of fuel duty for the second successive year. The rebate had been frozen for a long period, and it was unfrozen last year.
The Chancellor has said that he will consider the rates of fuel duty on a Budget-by-Budget basis. He has also said that any revenues from real-terms increases in fuel duties will go straight into a ring-fenced fund for improving public transport and modernising the road network, from which Scotland would receive its share in line with the Barnett formula.
Those are all important initiatives. I do not for a moment suggest that any of them mean that people in remote areas do not need a car. I accept that many people in remote areas and, indeed, in many parts of the country, need a car. However, it is important to emphasise how much the Government have done to improve the provision of bus and other public transport services. I would not want to underestimate the importance of the additional provision that they have made in improving public transport services for people in remote areas and elsewhere.
§ Mr. Alasdair Morgan (Galloway and Upper Nithsdale)
Will the Minister concede that in many of the island and rural areas that we are discussing, no amount of money put into bus services will address the essential problem to which the hon. Members for Western Isles (Mr. Macdonald) and for Argyll and Bute (Mrs. Michie) referred? We are talking about areas in which bus frequency is not measured in how many buses come per hour but how many buses come per month. Therefore, the Government's measures are not a substitute, in economic terms, for use of the car.
§ Mr. Timms
I accept that many people in many parts of country need to have a car. However, I would not want us to lose sight of the importance of public transport services, even in some of our more remote areas. I simply wanted to put that on the record.
When we met in January—and, to some extent, today—my hon. Friend suggested a number of measures that would help, including exempting rural motorists from increases in fuel duty and making red diesel available for on-road use. There are a number of serious obstacles to such proposals. Not only do they conflict with our legally binding obligations under European Community directives on oils taxation, but they could conflict with EC state aid rules. We had the opportunity to discuss those issues when we met in January.
EC law sets out clearly the circumstances in which oil may be subject to a reduced rate of duty. Any new differentiated rate of excise duty requires a derogation from that directive, and such derogations are difficult to 111WH obtain. No new derogations have been allowed on a regional basis since the introduction of the single market in 1993, and it is unlikely that any would be allowed.
Even if that were not a problem, there is also a question of principle involved in asking some UK motorists to pay for the environmental consequences of burning fossil fuels while others do not. Other problems would be involved in administering the changes which, although less significant, still need to be considered.
§ Mr. Macdonald
My hon. Friend mentioned the difficulties with European Union regulations. Does he accept that Portugal and Greece have concessions that have a geographic basis? Why is it unlikely that the United Kingdom would be able to obtain a similar concession?
§ Mr. Timms
Those derogations were already in place when the single market was established. In a sense, the European Commission was willing to make an exception for some existing arrangements to bind those countries into the single market. The prospects for obtaining new derogations, in the UK or anywhere else in the EU, is pretty slim. I would not want to mislead hon. Members into thinking that there may be a prospect of that at the moment.
I certainly recognise the concerns expressed this afternoon. However, many other groups consider their need for access to cheaper petrol and diesel to be equally as great including, for example: road hauliers; people with disabilities; the unemployed; and those on fixed incomes, in particular pensioners. My postbag, and I suspect that of my hon. Friends and other hon. Members present, contains vigorous representations from all those groups.
At the meeting in January, I told my hon. Friend that the Scottish Executive should certainly consider how best to use the rural transport fund to help to alleviate some of the difficulties in remote communities. Representatives of the Highlands and Islands Transport Forum at the meeting said that they would be interested in providing advice to the Executive on how best that money could be spent. I would urge that those discussions should proceed.
When we met, my hon. Friend called for discussions about the feasibility of a vehicle excise duty concession for the remote Scottish islands. There have already been contacts between the Treasury and Scottish Executive officials to discuss both the proposal for a general concession for car owners in the islands and the scope for widening the existing small island vehicles concession for goods vehicles to cover some of the larger Scottish islands as well.
Both those measures would be complex to administer and difficult and time consuming to legislate for, but, nevertheless, Treasury and Department of the Environment, Transport and the Regions officials will be discussing the practicalities of those ideas with the Scottish Executive to inform the Government's future Budget options.
I remind my hon. Friend that a lower rate of VED was introduced in the Budget last year for cars up to 1,100 cc. That rate applies throughout the country, but it has offered some relief to people in rural areas, such as the 112WH ones to whom hon. Members have drawn attention, who have to depend on a car and have chosen a smaller-engined model.
On air passenger duty, remote communities—in particular island communities—often rely heavily on air transport links to maintain their way of life. There is no doubt about that; nor have I been left in any doubt that people in those communities see the air passenger duty, which may be included in the price of their air travel, as a burden. I say "which may be included" because, as hon. Members will be aware, many routes use small aircraft, which are exempt from the duty.
The Government recognise the importance of air transport to the Scottish highlands and islands, which is why my right hon. Friend the Chancellor of the Exchequer announced in his pre-Budget report last November that we would be consulting on an exemption from air passenger duty for flights departing from airports in the Scottish highlands and islands. Our primary aim in doing so was to consider ways to reduce the impact on the region's air travellers of the removal of the present exemption for the return leg of a domestic round trip, which is necessary to comply with our European Union treaty obligations.
At present, air passenger duty is charged not on the return leg of a return flight within the UK, but only on the outward leg. This different treatment for domestic flights compared with flights within the EU needs to be ended and we are consulting on what adjustments to make to the scheme at the same time. We are consulting on an exemption for flights from the Scottish highlands and islands. The formal proposal is to exempt flights from airports in areas that fall within the EC's nomenclature of units of territorial statistics II classification, where the population density is 12.5 persons per square kilometre or less—the standard definition of sparsity.
In the course of the consultation, we have received many letters from a wide variety of interested parties, including members of the public; small businesses; tourist organisations; and members of both the Scottish Parliament and this House. As hon. Members here would expect, those letters were almost universally in favour of the proposed exemption, although many urged us to go further—as my hon. Friend has done—and to exempt flights to the highlands and islands.
Hon. Members would not expect me to comment further on the likely outcome of the consultation at this stage. That is a matter for another speech, which my right hon. Friend the Chancellor of the Exchequer will be making next week. However, it is worth pointing out that an exemption would not merely mean that travellers from airports in the highlands and islands would pay no more duty than at present. Exempting flights made from airports in the region would mean that all passengers on flights between airports within the region would be relieved completely from air passenger duty. Duty would be due only on flights to airports in the region from outside—in other words, on one leg of a return journey between the region and anywhere else in the world, as at present, and on neither leg of a journey within the region.
I emphasise that every flight leaving any airport in the highlands and islands would be exempt under our proposal—not merely a proportion of them— 113WH irrespective of destination. Inverness would be included as one of the airports to benefit, but Aberdeen, which is located in the north-eastern Scotland region, which is a less sparsely populated region on the EU definition, would not.
Some representations have suggested that the exemption should also cover flights to the Scottish highlands and islands. My hon. Friend made such representations today and when we met in January. Other hon. Members have done so by letter. All those representations are being carefully considered within the consultation exercise and I am not able today to prejudge the conclusions that the Chancellor will reach. However, I need to point out the real practical and legal difficulties that would arise from such an exemption. To remain compliant with EU law, any exemption on flights to the highlands and islands would have to extend to flights to any region in the European Economic Area that meets the same criterion of remoteness. That would probably include northern Sweden, northern Finland, 114WH Norway and Iceland. The concession would therefore have to go a good deal further than for the highlands and islands, and hon Members would acknowledge that that would present us with a problem in introducing a change of that sort.
I hope that I have been able to demonstrate to my hon. Friend and hon. Members that we take very seriously the concerns that he has consistently raised, which are shared by his constituents and hon. Members who represent the remoter areas of Scotland. Equally, I think that he will understand that major questions of Government revenue, environmental protection, fairness and European law need to be taken fully into account in dealing with these matters. I am sure that he will be listening with special interest to the announcements that my right hon. Friend the Chancellor will be making to the House next week. I emphasise to my hon. Friend that my officials and I will be happy to discuss these matters further with him once the Budget announcements have been made.
§ Question put and agreed to.
§ Adjourned accordingly at one minute to Two o'clock.